Chinese bank to sell $2.2b of bad debt as securities

BEIJING • Agricultural Bank of China is planning China's largest sale so far under a trial programme for lenders to offload bad loans by packaging them as asset-backed securities.

The lender plans to sell securities backed by 10.7 billion yuan (S$2.2 billion) of non-performing loans (NPLs) on the interbank bond market, it said last Friday on the Chinese bond-clearing house website.

The sale price will be the equivalent of 29 per cent of the loans' face value, with the recovery rate on the debt forecast at 41 per cent, the lender's statement showed.

As corporate leverage soars and economic growth cools, China's banks face a rising tide of bad loans. Ms Dorris Chen, a credit analyst at Pacific Investment Management, said last week that the Ministry of Finance will eventually have to inject capital into the banking system, without saying when.

"At the moment, banks are doing this to test the waters rather than making it a primary way of disposing of bad loans," said BOC International Holdings analyst Yuan Lin. The terms are favourable for investors, the analyst said.

The nation's efforts to get to grips with its credit woes include debt swaps for local governments, proposals for banks to swap loans for equity stakes in companies, and the trial of the NPL-backed securities.

The China Banking Regulatory Commission said on July 15 that the NPL securities programme - so far used by lenders, including Bank of China and China Merchants Bank - will be expanded. It was not more specific.

Pimco's Ms Chen was sceptical that large-scale sales of the securities will take place, citing investors' likely perceptions of the risks.

In the sales so far, banks have been the biggest buyers - raising questions about how effective the deals are in cutting risks within the financial sector.

Agricultural Bank's securities will include a 2.06 billion yuan senior tranche and a one billion yuan subordinated tranche, it said.

"The pilot programme has gathered some momentum recently, but it still lags behind the speed of the accumulation of NPLs on banks' balance sheets," said BOC's Mr Yuan.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on July 26, 2016, with the headline 'Chinese bank to sell $2.2b of bad debt as securities'. Print Edition | Subscribe